Gold News

Gold Prices "Could Benefit from Central Bank Liquidity"

If there is a QE3, it's going to have to be big...

THE RECENT run up and subsequent fall back in Gold Prices has made a number of people wary about the metal while commentators on both sides of the gold divide have used the volatility as proof of their respective positions, writes MineWeb's Geoff Candy.

Either that gold is in a bubble or at least reaching bubble territory and this is the first of further declines, or, on the bull side, that this latest correction is nothing but a needed release of steam ahead of the next up-leg.

But while volatility has increased across the board, the fundamental situation facing the global economy has changed very little over the last few weeks.

For Dundee Wealth Economics chief economist, Martin Murenbeeld, it is this continued bleak outlook both in the US and Europe and, indeed, emerging economies as well that bodes well longer term for Gold Prices.

"I think there is a risk of a bank failure in Europe," says Murenbeeld, speaking on Mineweb's Gold Weekly Podcast, although he was unable to put a specific probability on its likelihood.

"We heard this risk expressed in various speeches in Jackson Hole; of course Trichet said there was absolutely no risk at all of a bank failure in Europe, but then we saw the merger of two banks in Greece. When banks merge there is an implication that one bank is having difficulty and needs to be merged with a stronger bank. So there is indeed a non-zero probability of bank failure in Europe."

Murenbeeld points out that a bank failure would have massive contagion effects if not properly contained and the only way to contain such a failure, as was seen in 2008 is with massive amounts of liquidity.

"The first thing that a central bank was constituted to do is to provide liquidity as a last resort – central banks are lenders of last resort – they were really created to deal with the contagion effects of bank failures. So central bankers have no choice but to flood the system with liquidity so that payments can be made and any doubts on the part of the public and of businessman about the health of their banks can be put to rest. All that takes a lot of money! Historically when liquidity rises rapidly in response to banking crises Gold Prices go up."

The problem for Europe, is that the decision has to be made in light of the needs of the entire European Union, which makes life decidedly more difficult.

For Murenbeeld, the key will be the decision by Europe's fiscal authorities on the European financial stability facility, on which Germany will deliberate on September 23.

"If Germany and others do not agree to the European financial stability facility there will be a mess in Europe. There will be massive speculation that a bank is going to fail. The ECB is going to have to pump money into the system and Gold Prices are likely to go straight up."

Across the pond, in the US, American politicians have equally difficult decisions to make.

"The US economy is technically dead in the water. I can't see enough growth to lower unemployment rates meaningfully. (I don't see a recession either however.) So, at some point in time, the Federal Reserve is going to have start easing monetary policy further."

And, as he points out, "Given the relatively limited bang for the buck, QE3 in whatever form is going to have to be big in order to get a little bit of growth. That will help gold immensely."

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

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